The importance of financial statements in business accounting

The importance of financial statements in business accounting

One of the most important aspects of accounting for small businesses is producing annual financial statements. But what types of financial statements should you produce and why?

Types of financial statements

1. Invoices

Invoices record incoming and outgoing financial transactions between you, your clients, and third parties. These details are essential for accurate financial statements and efficient bookkeeping practices.

2. Income reports

Income reports are statements created from invoices. They give a representation of your business’ ability to make money over a fixed period, usually monthly or quarterly, and allow you to see just where your money is going.

3. Balance sheet

Balance sheets give you an overview of the total value of your business at any one point in time. They contain details of your capital and financial assets, as well as your liabilities.

4. Cash flow statements

Cash flow statements utilise the information gleaned from your previous financial reports and how your business has performed financially over a set time period. Cash flow statements show you whether you’re trading in profit or loss and how these figures have fluctuated.

The purpose of financial statements

It’s important that you ask your accountant to produce these financial statements for you for a number of reasons.

Detailed financial records for your business may be required for:

  • Loan negotiations
  • Sale of the business
  • Audits
  • filing of tax returns

Accurate and up-to-date financial reports can enable you to make decisions about future business projects and development. You can keep track of overspending, monitor when sales increase or decline, and keep track of your overall spending habits.

Financial statements can be invaluable when you’re trying to attract new investors to your business. Most financiers won’t risk their cash without evidence that your business is profitable and successful. Financial statements will also allow you to forecast what your future profits are likely to be, and this can be crucial in finalising investment deals.

If your business has shareholders, they will want to see that your company is doing well, and healthy financial statements are a good way of inspiring their confidence in you.

In conclusion

Accurate and timely financial statements are essential for the efficient and smooth running of a small business. Running your own business is time-consuming and it’s best to hire an experienced firm of accountants to handle the production of financial statements for you. This not only relieves you of a potentially onerous task, but it also ensures that the job will be done correctly, which is clearly much better for your business.

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